Debt causes a lot of damage. In my experience, this is true of all debt. The anxiety you feel when working to pay back debt is the same across the board – whether you’re looking at unpaid credit card bills or one hundred thousand dollars in undergraduate student loans.
Debt causes a lot of damage. In my experience, this is true of all debt. The anxiety you feel when working to pay back debt is the same across the board – whether you’re looking at unpaid credit card bills or one hundred thousand dollars in undergraduate student loans.
It’s important to look at how debt can impact your life and get a full understanding of why you need to prioritize paying it off, and how you should go about doing that to have the fastest, most positive impact you can.
Debt and Finances
Many of my clients are medical professionals in various specializations. Even for individuals in these career paths, the negative impacts of debt far outweigh their high salary.
The most obvious way debt has a negative impact on your life can be found in your monthly budget. If you’re perpetually making high payments on debt with interest, you’re paying more than you originally would have if you purchased something with cash. In the simplest terms, this kind of overspending isn’t great for your wallet.
Debt – specifically student loans, which most American citizens face in one form or another – can also have problematic repayment terms. For example, some (though not all) penalize you for early repayment. In some cases, you could end up paying more in interest than in loan principal – possibly putting you into even more debt than you originally thought you signed on for! And, don’t get me started on negative amortization for those of you who are in Income-Based Repayment now – you better hope you remain eligible for the life of your loan!
Debt also lowers your total net worth, and can make growing wealth and savings in the long run difficult. The longer you take to pay down your debt, the less time you’ll have to save for big-picture goals like retirement, purchasing a house, or world travel.
Long-Term Impacts
Debt, while financially burdensome, also has long-term impacts on your quality of life. Paying back your debt often puts you behind the eight ball, and has a negative impact on your credit. In general, your total debt comprises 30% of your credit score. That’s a huge chunk of your credit score calculation! If your debt ratio is high, or if your total debt payments are more than 30% of your income, your debt is much more likely to negatively impact your score.
Having bad credit makes it difficult to get into a good lease, buy a house, obtain a cell phone contract, higher insurance premiums – and those are just a few of the potential ramifications you might face.
Debt also has a tendency to breed more debt. This is, in part, because of the higher interest rates you face on credit cards and loans when you’re already in debt. It’s also a direct result of the negative lifestyle inflation cycle debt often creates. Once you grow accustomed to the kinds of things you can purchase using loans (mortgage, student loans, or auto) or credit cards, it’s difficult to adjust your way of life to live within your means.
Debt and Your Health
Being in debt isn’t a good feeling – that’s no secret. According to a study, 72% of all Americans say they feel stressed about money.
But it’s more than just something that makes you feel less than awesome about yourself. Being in debt can cause emotional, mental, and physical health problems in the long run.
A few common emotions surrounding debt are:
- Depression
- Anxiety
- Anger
- Fear and/or Panic
The idea of not being able to repay your debt, or being tight on money month to month because you’re buried in loans inspires these negative emotions.
Being in debt can also have physical ramifications. Many people – specifically millennials – say they often feel physically ill or in pain as a result of thinking about their debt and how they’re going to pay it off.
You Have Options
If you have debt in your life, repaying it is probably on your mind to some degree. When working with my clients, I usually put a focus on paying debt off efficiently and quickly. In fact, my 10/20/30/40 budget recommends you take 30% of your after-tax income and dedicate it to debt repayment.
Once you decide to prioritize repayment, you need a strategy. You can organize your repayment plan in several ways, here are just a few of your options (or you can download our ‘Debt Hit List’ here):
- Organizing your debts in order from highest interest to lowest interest, and focus on paying off the highest interest loans first.
- Deciding to pay off small loans first to help free up cash flow. The extra funds you’ll have after you pay off small debts will allow you to put more toward bigger, more daunting loans.
- Choosing to pay debts that have negative emotions attached to them first. Example: the credit card debt you got into when making a large, ill-advised purchase that you regularly kick yourself about. This is a good way to stay motivated to continue repaying your other loans.
Paying debt back is a long-term financial goal, and staying out of debt is a habit you have to work hard on. A financial planner can help you stay on track. If you want help creating a repayment plan of your own, or you just need a sounding board as you start to create your own strategy – I’d love to talk. Feel free to reach out today and set up your free consultation.
